How do I convert a large image to a very small image without losing resolution?

I'm working with CS2 and I have a .png image that's 2048 pixels by 1536 pixels and I want to shrink it down to fit into a web banner whose size is 320x50. When I try to shrink it down the image gets pixelated.

That's the nature of raster imagery. In order to size it down, Photoshop must down-sample the image which result in a loss of information and a certain amount of pixelation. You can try using a different sampling algorithm (Photoshop offers several) and you can employ any number of sharpening/softening filters to help define the final output. If you Google, you can find dozens of tutorials for resizing images with Photoshop. When I create icons and smaller images, I skip Photoshop. Oddly enough, I get much better results when I use this online resizing tool.

Use another format other than JPEG (PNG or GIF); the results in terms of both file size and image quality will depend on the content of your image; each is better at certain kinds of content.Make the image smaller in terms of pixels - this will have a very significant effect and should definitely be considered if you have control over the overall layout